How the Free Market Rocked the Grid 551
sean_nestor sends in a story at IEEE Spectrum that begins:
"Most of us take for granted that the lights will work when we flip them on, without worrying too much about the staggeringly complex things needed to make that happen. Thank the engineers who designed and built the power grids for that — but don't thank them too much. Their main goal was reliability; keeping the cost of electricity down was less of a concern. That's in part why so many people in the United States complain about high electricity prices. Some armchair economists (and a quite a few real ones) have long argued that the solution is deregulation. After all, many other US industries have been deregulated — take, for instance, oil, natural gas, or trucking — and greater competition in those sectors swiftly brought prices down. Why not electricity?"
Re:No More Deregulation (Score:5, Informative)
Uhh... (Score:4, Informative)
Such arguments were compelling enough to convince two dozen or so U.S. states to deregulate their electric industries. Most began in the mid-1990s, and problems emerged soon after, most famously in the rolling blackouts that Californians suffered through in the summer of 2000 and the months that followed. At the root of these troubles is the fact that free markets can be messy and volatile, something few took into account when deregulation began. But the consequences have since proved so chaotic that a quarter of these states have now suspended plans to revamp the way they manage their electric utilities, and few (if any) additional states are rushing to jump on the deregulation bandwagon.
Yeah, so, how about not continuing this experiment with our critical infrastructure?
Re:Airplane tickets. (Score:5, Informative)
Airplane tickets are fantastically cheap relative to 30 years ago when the deregulation started. You could pay $1,000 to fly coast to coast in 1980 dollars. Now, the last time I flew it was $450 in 2010 dollars.
Re:No More Deregulation (Score:4, Informative)
The system you describe is exactly what we have in Texas. The only thing we got out of deregulation is a bunch of sleazy 'energy companies' that don't do anything more than tack on sleazy and underhanded fees to our electric bill.
Thanks to this scheme Texans pay higher prices for our electricity than surrounding states. Fortunately for our corrupt politicians like Rick Perry, most Texans are too dumb to notice that we've been taken advantage of.
When you consider that Governor Perry still managed to get re-elected after skipping the only debate against Democrat Bill White, its clear that Texas is the perfect state to let the 'free market' raise costs for everyone while the ignorant masses cheer them on.
Re:No More Deregulation (Score:5, Informative)
Capitalism 102 (Score:5, Informative)
<sarcasm>I am always surprised of how easily these "neocons" forget the most basic economic concepts of the system they worship... They forget things basic concepts like ROI, entry barriers and so on, as long as forgetting them favours their dogmas.</sarcasm>
In short, in Capitalism 101 we saw that, in a pure free market, if sector A has profits better than sector B, then inversions will flow from sector B to sector A, increasing supply until price drops, and profits in both sectors are the same.
In Capitalism 102, we saw that, in real life, maybe building a new enterprise in sector A is not just as easy... it may require huge inversions, a big risk (if by entering the market they lower collective profits, maybe the ROI won't be positive), and outright collusions (for example, all enterprises in sector A join and tell you "if you enter into our sector, we will presure our suppliers so nobody does provide you with the materials you need if they want to do bussiness with us").
In Campitalism 103, we all saw what happened to Enron.
In my country, the former monopoly of telcos (Telefónica, now Movistar) still is the only supplier when you need some services in some geographical areas (not by law, but the other telcos do have wanted to get the infrastructure). Sometimes when they have lost a contract with us, they have blocked providing the service through the winner to the maximum that the law allowed them (and at least we have some law forcing them to provide the service in a limit time).
Of course, some illuminated people will only repeat Capitalism 101 lessons while covering the ears to avoid realising what they are really saying...
Re:Suicide! (Score:5, Informative)
You may be too young to know, but you used to not be allowed to own your own phone. You had to rent one from the government monopoly. It was a crime to hook an unapproved device to your telephone line. Deregulation allowed people to do evil unapproved things like run BBSs in their houses and hook modems up to their phone lines.
If you're talking about the US, that's exactly backwards. It was a breach of your contract with the telephone company - which was allowed to become a monopoly by the US government - but not a crime, and it was actually government regulation that forced the phone companies to allow you to connect phones and other devices not rented from the company.
Re:Deregulating a bad idea for essential services (Score:5, Informative)
Nobody said those things should be free. But developed countries have measures to ensure that people can obtain them even if they couldn't afford them in a pure free market - precisely because they are essential. But that's unrelated.
Infrastructure is a prime candidate for regulation, because of its "natural monopoly" character - in the absence of regulation, it's very easy for a dominant company to squeeze everyone else out and then exploit their monopoly. Telephone and internet connections got a lot cheaper and faster here (UK) when the dominant phone company were required to let other providers use their network.
Re:Airplane tickets. (Score:2, Informative)
Wow, I can see you learned math at a public school. If tickets used to be $1000 and are now $450 in dollars that are worth a third as much then prices are only *fifteen percent* of what they once were. That's less than *one-sixth* the former price.
Re:No More Deregulation (Score:5, Informative)
I sent this in to Slashdot yesterday and it was, of course, not used.
http://www.businessweek.com/news/2010-12-23/why-businesses-can-t-stand-free-markets-veronique-de-rugy.html [businessweek.com]
It's a great article in Bloomberg businessweek about how so many companies DON'T want a free market and all the hypocrisy going around about the term...
Re:No More Deregulation (Score:5, Informative)
Re:No More Deregulation (Score:5, Informative)
In Alberta, Canada we have deregulation. Production, transmission and sales are 3 separate entities. You buy from whoever you want. Transmission and consumption are charged as separate items on the bill. Both charges have a fixed rate and a variable rate based on usage. The power bills have more than doubled. The sales people tell customers we can lock you in for 3 - 5 years because rates are going way up. The lock in ends up being higher than the regulated rate (This was kept for those who didn't sign up).
We could buy power and gas from a British company that didn't have any gas wells, pipelines, generators, or wires in Canada.
Re:No More Deregulation (Score:4, Informative)
Re:No More Deregulation (Score:5, Informative)
Did not the state of California try this with tragic consequences? Rolling blackouts to keep prices artificially high.
No. California basically setup a system that was guaranteed to fail. They split generation from distribution, capped prices to customers but allowed the generators to charge market rates to distribution companies, mandated service for all, prevent companies from entering long term supply contracts; and then sat back and disavowed involvement when things went to hell.
CA is essentially two islands when it comes to power - once he inter-ties were fully loaded no more power could be imported and prices(to the distributors) rose as higher price units went online. When they couldn't pass on the costs, and as a result end users weren't driven to cut consumption which would lower demand and prices, bankruptcies ensued. Politicians screamed. Babies cried.
Couple that with companies such as Enron doing roundtrips to drive up prices and things went south quickly.
There were people who said that would happen - but they were largely ignored. Oh well.
Insane Deregulation Amnesia (Score:5, Informative)
Seth Blumsack, the author of that offensive lie, should be forced to read aloud the live data feed of the oil and gas market prices. For the rest of his life. Oil and gas prices have skyrocketed without regulations protecting us from speculators, supply side manipulation, and every other kind of abuse the market manipulators cook up. Trucking is a random example of an industry never properly regulated enough that is also not actually deregulated.
But right there under lying Blumsack's byline is a cluster of pictures of Enron creating a faked energy crisis in California, because deregulation allowed it. Of course, that crisis also required Bush and his lying "free marketeers" to be running the Federal government, which is obligated to protect one state from interstate commerce abuses that damage it - which is what Texas deregulation allowed by keeping Enron's practices and books secret, even though California's deregulation required opening them.
Re:No such thing as a free market (Score:4, Informative)
The fundamental difference between the state and all other economic actors is that the state is (or rather can be) democratic, with everyone having a voice. So it is directly controlled by the populace, unlike corporations, and - properly implemented - can be trusted to operate in the interests of the society as a whole.
Then, of course, a regulating state breaking up monopolies is not itself a monopolist, since it does not own all the property, nor fully command it.
Re:No More Deregulation (Score:5, Informative)
Re:No More Deregulation (Score:5, Informative)
We've got the same scheme in Texas. Electric bills changed from being a simple "Your used X KWH last month, pay us X * 0.10 dollars" to being like cell phone contracts with opaque pricing models, multitudinous fees, taxes, and surcharges, two-year commitments (with early termination fees), etc. Unsurprisingly, we now pay more on average than people in surrounding states where electricity is provided by a monopoly public utility...
It worked so well in California... (Score:5, Informative)
Blindly recommending deregulation on a commodity that is bought and sold in an a marketplace that promotes investing and speculation instead of direct production, distribution, and consumption creates a situation that will blow up unless it is regulated in some fashion.
(Of course the SEC has shown it can really keep a handle on this type of thing... hmmm... uhhh, urrrk...
Re:It worked so well in California... (Score:5, Informative)
What was the worst thing about California, it was regulation that brought about the shortages that caused the price spike. Retail prices were fixed. Fuel costs went up. Unprofitable generation went offline for for repairs, maintenance, or upgrades, or simply shut down.
This was followed by a mild heat wave. The result was rolling blackouts as the cheap efficient sources were inadequate. New generation and transmission was not built due to lack of profit.
This lead to buying power on the spot market. Due to the price caps on the retail level and no caps on the wholesale level, and mandatory supply contracts, local governments were required to buy energy at the spike in the spot market and sell at fixed retail. This is where the meltdown started.
To make matters worse, the delivery was choked by an undersized transmission line in a corridor. This path 66 limited the amount of lower cost power that could be purchased from neighboring states. This made the local spot prices even more volatile.
This reliability report lists the issues of the two corridors for power into the Southern California area.
http://www.electripedia.info/reliability.asp [electripedia.info]
Re:No More Deregulation (Score:2, Informative)
Opposed to this, British Columbia, one Province over, is still served by a Crown Corp -- and customers not only have reliable service and low rates, but since the corp sells excess power to other grids, the profit from this comes off people's bill. Not only that, this has been run in this manner ever since it was split off from the similarly run Telehraph company. It has not collapsed or got tied up in bureaucracy.
Re:No More Deregulation (Score:2, Informative)
As other posters have pointed out, this seems to be an argument over terminology: what exactly is a 'free market'? The classical economic definition, which we might call a 'competitive market', is a market where there are many suppliers competing, without restriction, to sell products. If there's a monopoly, or even an oligopoly, it's not a free market any more. (There are some other requirements: for example, all participants must have perfect information about the state of the market for it to fit this definition.) To achieve in practice something close to this theoretical ideal, you generally need some degree of regulation (for example, requiring that prices be displayed).
Then there's what we might call an 'unregulated market' (and an economist would call a 'laissez-faire market'). The only requirement for this is that there be no regulation. This may preclude it from being a free market by the other definition, above.